I would like to know how professional mechanics manage liability in the event that something goes wrong with a repair and a customer's vehicle is damaged or destroyed.

Let's suppose for example, that Joe Mechanic disassembles an engine for an overhaul and reassembles it incorrectly, causing major damage when the motor is started. The damage in this case could likely be a total loss on a modest used car.

If Joe works at a professional shop, is he personally liable to pay for the damage? Would the shop be financially liable first? Would Joe or his employer likely carry some sort of insurance to cover this situation?

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I'm pretty sure all legitimate shops carry insurance for this kind of thing. Oftentimes the building lease or mortgage will even require a business to have insurance policies appropriate to their line of business, because if the business goes bankrupt due to a huge liability like this, the landlord is out of rent, or if there's a mortgage, the bank might even have to fight with the injured party for the property.

With that said, in the real world most shops are likely to do everything they can to avoid admitting fault.

If it was a particular employee who screwed up, they're probably going to get fired, but I think you'd have a hard time pinning the financial liability on them.

Finally, the standard IANAL applies. Ask a lawyer, not a stackexchange site, if you need legal advice on these issues.